The International Energy Agency’s climate-friendly scenario spells doom for coal

A dramatic reduction in the size of the global coal industry would be required by 2040 if the world is to meet the agreed target of limiting the temperature increase to two degrees, according to the International Energy Agency’s (IEA) most climate-friendly scenario in the World Energy Outlook 2015 released last week.

In the ‘450 Scenario’ the IEA estimates coal demand will need to peak in the current decade and decline by a little over one-third by 2040; to account for just 12 per cent of electricity – from 41 per cent in 2013. The tables in the IEA report also indicate that the burning of lignite – the most carbon intensive of coals – would need to fall by just under half.

The outlook would be even worse for the global trade in thermal coal, with the IEA estimating it would need to more than halve by 2040 with the bulk of the production cuts occurring in the US, Indonesia, Russia and Australia.

The IEA even suggests that the burning of metallurgical coal – long touted by the industry as transcending the impacts of climate policies – would need to fall by 36 per cent by 2040. However, as metallurgical coal production is more concentrated than thermal coal, the IEA estimates the volumes traded in the international market would decline by a more modest 15 per cent.

The IEA also notes that any new mines would be “small incremental projects in mature mining regions” with the industry investing only “in the most viable new mining projects.” Despite the fall in demand in the 450 Scenario, the IEA suggests this will have only an appreciable effect on prices in the medium to long-term.

One other notable feature of the report is that the IEA’s once exuberant enthusiasm for Carbon Capture and Storage (CCS) is far, far more muted. (The IEA’s latest position on CCS is a topic for a post at another time.)

By way of background, the ‘450 Scenario’ is named after the 450 parts per million (ppm) of carbon dioxide level equated in the global climate negotiations as giving the world a coin’s-toss chance of keeping the temperature increase to two degrees. As we have just crossed the one degree temperature increase threshold, the 450 Scenario sets out what would be required to cap damage at about double that which we already have done.

It is also worth noting that the IEA doesn’t model the 350 ppm threshold Pacific Island nations and other low-lying countries argue is essential for their survival.

Reason for doubt about the IEA’s forecasting

The IEA’s “New Policies Scenario” is the one that is frequently quoted by the media and by the coal industry and governments, and the one that the IEA says is most likely to occur under current conditions. The New Policies Scenario though would increase global temperatures by well over the two degrees target. However, there are six strong reasons to believe that this scenario underestimates the likely fall in coal demand.

Firstly, the IEA’s World Energy Outlook 2015 is based on coal consumption data only to the end of 2013, so is almost two years behind what is happening in a rapidly changing global coal and energy market. Since 2013 there has been precious little good news for the coal industry.

Secondly, the IEA assumes that even in the 450 Scenario the global peak in coal consumption will be reached sometime later this decade. However, the most recent data indicates that 2013 was the peak year and coal demand is likely to fall by between two and four per cent in 2015.

Thirdly, the IEA notoriously underestimates the growth of solar and wind capacity. With the cost of renewables falling as the scale of the industry increases, thermal coal’s share of future generation capacity is likely to be far lower than previously suggested and getting smaller by the month.

Fourthly, the IEA has long had exceedingly close ties to the coal industry, which distorts how it sees the future of the coal industry and climate policy. It also relies heavily on data and analysis from Wood Mackenzie, which has long been a coal booster prone to a sunnyside view of coal’s prospects, especially in China.

Fifth, the IEA’s Executive Director, Fatih Birol in his Forward, states: “We look to the negotiators in Paris to destroy our projections in our central scenario, which we show are unsustainable.” A statement of fact on both accounts, but again a bizarre acknowledgement that governments and industry can’t afford to rely on IEA projections in the central scenario.

Finally, the IEA’s report demonstrates that it really doesn’t grasp the magnitude of the change in the Chinese coal and energy market. China’s shift away from coal – with 2014 and 2015 data demonstrating the decline in domestic coal demand – is accelerating each month. This will have profound consequences for the international coal market way beyond what the IEA has acknowledged to date.

There are other factors running against coal too. One is the shift in public opinion against increasing air pollution and away from coal power. Another is the rapid growth in the divestment movement and the global shift in public and private finance away from involvement in new coal plants.

There is a hint in World Energy Outlook 2015 that the penny may finally be dropping for the IEA on coal. In it the IEA warns of the dire consequences which would flow from the “possibility of a decline” in China’s coal use “in the coming years.” It states:

“Contemplating such a decline in China’s coal use is an uncomfortable process for the coal industry. The consequences would be dramatic, both in China – where 70% of Chinese coal companies are losing money – and on an already oversupplied global market. Even with a vigorous consolidation in the industry, the chances would be that mine closures would not keep up with declines in demand, leading to an unremitting overhang of supply, intense competition for customers and rock-bottom prices. Low prices could offer an incentive for additional consumption elsewhere, but not anything like the scale that could fill the gap left by China, given its weight in global coal demand.”

Why was the 450 Scenario so invisible in media reporting?

Curiously, the stark outline of the fate which would befall the coal industry if the two-degree target is taken seriously, attracted surprisingly little media coverage. (For example, none of the New York Times, The Guardian, Bloomberg or Reuters reports makes any mention of the 450 Scenario or the implications for the coal industry. The BBC didn’t report on the IEA’s new scenarios at all.)

If coal power is the single biggest source of human-induced greenhouse gas emissions, why was the coverage of the coal industry’s necessary rapid fall so muted?

Firstly, at over 700 pages the IEA’s report is huge, with the 30-page chapter on coal buried over a third of the way through. For a general reporter, the details on coal would have to be sought out and then interpreted. Few have the background and time available to go much beyond the executive summary. While the theme of renewables eventually triumphing over coal was covered, the rate at which it could unfold was obscured.

Another factor is that in their reports the IEA outlines three scenarios: the Current Policies Scenario, the New Policies Scenario – which assumes governments implement additional climate policy commitments beyond those they have already announced – and the 450 Scenario.

While the IEA provides details of all three scenarios, the bulk of the discussion in the report – and hence what most media coverage canvasses – is framed around the New Policies Scenario.

In the New Policies Scenario the IEA estimates coal growth of 12 per cent by 2040 with a significant increase in the global market. Less encouraging for the coal industry is its estimate that both lignite and metallurgical coal could decline by 15 per cent by 2040. Again, it is worth stressing those projections are based on 2013 data and the view that peak coal production is somewhere in the future.

As always, the devil is in the detail.

The doubts about the IEA’s assessment of coal’s future suggest that achieving the 450 Scenario (or better) may well be closer to being within reach than most commentators credit.

Bob Burton is the Hobart-based Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) Bob Burton’s Twitter feed is here.